Bandhan Bank Buy Recommendation Of Nirmal Bang

High earnings visibility on back of continued MFI dominance

We initiate coverage on Bandhan Bank with a BUY rating and fair value estimate of Rs490 based on 3.5x 1HFY23E ABV. Bandhan Bank enjoys a dominant position in the Indian micro-finance industry. Having maintained 20% market share over the last 4 years, we believe that Bandhan Bank is strongly positioned to gain in an industry which is expected to grow at 15% CAGR over FY21-26E. Bandhan Bank’s loans have grown at a 30% CAGR over FY17-20, backed by very high-quality and granular growth in deposits.

While micro-finance is expected to continue on the strong growth trajectory for the bank, we expect non-micro-finance segments to grow at a higher rate given the management’s vision 2025. We also expect Bandhan Bank to gain deposit market share, especially in West Bengal given that it offers relatively higher rate than frontline banks. The higher-rate strategy, even if it continues for longer, is not concerning as the high margins on the asset side shall be able to accommodate it.

The bank has done a commendable job in terms of improving the opex ratios. – cost/income ratio has improved from 36.3% (FY17) to 30.8% (FY20). We are building in a cost/income ratio of 32% over FY22-23E. Given that micro-finance collections are now inching towards normalcy and in absence of any large-ticket/corporate NPAs or state-specific agitations (such as in Assam), we believe that the bank’s balance sheet is sufficiently provided for in terms of addressing the asset quality impact due to Covid-19.

We expect credit cost to start moderating FY22E onwards, which will be a major driver of ROE improvement. Overall, we expect the bank to deliver an ROE of 18.6-22.9% over FY21-23E. In our view, Bandhan Bank is one of the few banks which provide a high degree of overall growth and earnings visibility. This comfort comes partially from the bank’s track record and its performance vis-à-vis peers. What strongly adds to our ‘visibility’ thesis is the specialized nature of the business i.e., micro-finance where the bank commands 20% market share.

Market dominance to continue: Bandhan Bank has maintained its Microfinance industry market share at 20% in last few years. Given the industry growth opportunity (15% CAGR FY21-26E) coupled with superior execution capability (as demonstrated so far), we expect Bandhan Bank to improve upon its market share (23.6% by FY25E). Non-MFI to grow at a higher rate: Under the vision 2025, the non-MFI segments (housing, SME, personal/retail) are expected to see higher growth. Over FY20-23E, we expect Bandhan Bank’s micro-finance portfolio to grow at ~21% CAGR, led by improving penetration in east/north-east India. Untapped states of West Bengal, Jharkhand and UP are expected to provide impetus for housing finance growth. We expect the non-micro-finance portfolio to grow at ~30% CAGR over FY20-23E.

Deposit scale up impressive; West Bengal market share to improve: The bank’s deposits have grown at 35% CAGR over FY17-20. Compared to 71% as of FY17, retail deposits constituted ~78% of the total deposits as of 2QFY21. Over FY17-20, CASA deposits have grown at 45.4% CAGR and retail TDs have grown at 34.9% CAGR. We expect Bandhan Bank to gain further deposit market share in West Bengal given it currently holds only 3% (1QFY21) vis-a-vis ~70% held by PSBs despite Bandhan Bank offering higher rates. Expect NIM to compress: Given that the share of micro-finance is expected to decline further, we expect blended NIM to compress. We expect 86bps compression in NIMs over FY20-23E.

Superior cost ratios: Over FY17-20, the C/I ratio has improved from 36.3% to 30.8%. Bandhan Bank’s employee cost per head is about 50% lower and rent per banking outlet is 63% lower than the second-lowest bank in our coverage. Given the geographical spread of the business, majority of the workforce and banking outlets are based in east/north-east where wages and rents are generally lower than other parts of the country. We see scope for 17-18% improvement in micro-borrowers-per-DSC ratio.

Historical asset quality track record better than industry: During some of the recent events, which proved to be detrimental to the micro-finance industry’s asset quality, Bandhan Bank’s 90+ dpd numbers were 50-90% lower than the industry. Even in the current situation, Bandhan Bank has reported better-than-industry collections in the micro-finance portfolio. We expect credit cost to trend down FY22E onwards, which will be a major driver of ROE improvement.